HP Earnings: Currency Effects Drive Downtrend In Revenues

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Hewlett-Packard (NYSE:HPQ) on  August 20th reported the final quarterly results  before it splits itself into two independently traded companies, which is expected to take place Nov. 1. (Fiscal year end with October.) In line with our expectations, HP’s revenues declined by 8% year over year to $25.3 billion. [1] On a constant currency basis, the decrease was a bare 2%.  The company delivered $0.47 in GAAP diluted net earnings per share, 10% decline from the year-ago quarter. The company attributed the decline in revenues to the appreciation of the U.S. dollar and soft demand across the IT services business. The softness in demand was further accentuated by the challenging business environment in Russia and China. In this note, we will review results for its divisions.

See our full analysis on HP

Outlook for Q4 and 2015

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For Q4 FY15 (Q3 CY15), HP estimates non-GAAP diluted net EPS in the range of $0.92 to $0.98. It expects GAAP diluted net EPS in the range of $0.12 to $0.18. Fiscal 2015 fourth quarter non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.80 per share, related to separation costs, the amortization of intangible assets, restructuring charges; defined benefit plans settlement charges and acquisition-related charges. For fiscal 2015, HP estimates non-GAAP diluted net EPS between $3.59 and $3.65 and GAAP diluted net EPS between $1.87 and $1.93. [2]

Segment Wise Results

The company reported following results for each segment (constant currency results below):-

  • Personal Systems revenue declined by 13% year over year. Commercial revenue decreased 9% and Consumer revenue decreased 22%. Total units were down 11% with Notebooks units down 3% and Desktops units down 20%.
  • Printing revenue declined by 9% year over year. Total hardware (printer) units were down 2% and supplies revenue declined by 6%.
  • Enterprise Group revenue grew by 2% year over year. Industry Standard Servers (ISS) revenue was up 8%, Storage revenue was down 2%, Business Critical Systems revenue was down 21%, networking revenue was up 22% and Technology Services revenue was down 9%.
  • Enterprise Services revenue declined by 11% year over year. Infrastructure Technology Outsourcing revenue declined by 13%, and Application and Business Services revenue declined 7%.
  • Software revenue declined by 6% year over year. Within this segment, License revenue declined by 11%, support revenue declined by 3%, professional services revenue was declined by 8% and software-as-a-service (SaaS) revenue by 4%.
  • HP Financial Services revenue was down 6% year over year with a 2% decrease in net portfolio assets and a 2% decrease in financing volume.

Broader Trends In Each Division

In our per-earnings note, we had stated that the company is expected to report yet another quarter of disappointment due to prevalent trends in the industries HP operates in. A summary of the trends and the impact on HP’s division is as follows:

  • HP’s PC and Workstation division is the fourth largest division, contributing nearly 30% to its revenue and 14.6% of its estimated value. According to Gartner, worldwide PC shipments experienced a decline of nearly 10% in the second quarter of 2015 as customers awaited the release of Windows 10 in July. [3] HP’s personal systems division performed inline with the industry as both the number of shipments and revenue during the quarter declined. The company reported 11% decline in total units shipped during the quarter. While consumer revenues declined 22%, commercial revenues declined by 9% as the buyers deferred PC purchases in advance of the expected release of Windows 10. As a result, the company reported 13% year-over-year decline (7% decline in constant currency) in revenues to $7.5 billion. Operating profit declined to $222 million or 3% of revenue indicating the intense price competition in the industry. Furthermore, currency effects remained a significant headwind for this business, although HP managed to offset about half of the ASP impact with price adjustments and mix.
  • The Enterprise Group is HP’s third largest business division and makes up 20% of its value. This division includes HP’s Industry Standard Servers (ISS), Business Critical Systems (BCS), and storage solutions. The division was able to buck the headwinds of currency appreciation and reported revenues at $7 billion. While there was a 8% year-over-year (15% in constant currency) revenue growth for ISS, the company continued to experience a decline in its Business Critical Systems division as revenues declined by 21% year over year (15% in constant currency). The company reported double-digit increases in ISS’s ASPs as the Gen9 ProLiant server and strength in density-optimized systems drove margins. Going forward, the combination of Gen9 and the refresh cycle of the server line should drive growth in the remainder of 2015. The storage division revenues declined 2% (7% growth in constant currency) to $784 million as the mid-tier 3PAR storage unit continued to gain traction, and revenues from converged storage grew during the quarter. HP expects storage to be a growth driver in constant currency in Q4.
  • The services division makes up 22% of HP’s estimated value. HP’s enterprise services division reported a 11% year-over-year decline (3% decline in constant currency) in revenue to $5 billion. However, the company was able to stabilize revenues due to less account revenue run off and increases in new signings. Furthermore, the company reported win rates for in double digits year over year. As a result, this was HP’s best performance since Q3 FY2012.
  • The printer and ink cartridge division is HP’s largest contributor and makes up 29% of its value. The printer division reported 9% year-over-year decline (7% in constant currency) in revenues to $5.1 billion in the quarter as supplies revenues declined by 6%. The channel inventory for supplies increased during the quarter indicating that slowdown in sales. This also suggests some softness in demand in the future. Furthermore, declines in low-end home and single function laser hardware units drove overall consumer units down 6% year over year. Additionally, aggressive pricing from Japanese competitors in the printing business, primarily due to the weakness of the Yen, continued to challenge HP’s market share.
  • The software division makes up 7% of HP’s estimated value. Software division revenues were impacted by the shift in its portfolio and operating model to SaaS and subscription-based offerings. The company reported 11% decline in license revenues, and 6% decline in service revenues. As a result, HP’s software division revenues witnessed 6% year over year (1% in constant currency) decline in revenues to $900 million. However, HP reported double-digit revenue growth in its cloud, security and big data services. We believe that cloud services are potentially the biggest new revenue source for HP in FY2015.
  • The HP networking division makes up 3.8% of HP’s estimated value. Over the past few quarters, revenues for this division have been declining. However, the recent acquisition of Aruba networks boosted networking revenues. HP reported 22% year-over-year (28% in constant currency) growth, driven by strong performance in all regions except China. Even without Aruba, the business grew mid-single digits in constant currency. We believe that HP will continue to make headway in networking vertical as it targets the challenging mobility network segment.

We have revised our price estimate $27.51 for HP, which is inline with the current market price.

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Notes:
  1. See HP’s pre-earnings article []
  2. 8-K []
  3. Gartner Says Worldwide PC Shipments Declined 9.5 Percent in Second Quarter of 2015, July 9 2015, www.venturebeat.com []